Baseball’s star players may get the glory on the field, but in the 21st century, it’s shrewd management that wins titles.
From Billy Beane at the Oakland Athletics to Theo Epstein at the Chicago Cubs, the guys upstairs are as important as those on the field, and their power to recruit the right players can be make or break.
Growing up playing baseball in Brooklyn, New York, Don Marchesiello eschewed personal glory; he wanted the whole team to win together. Back then, it made him wise beyond his years; today, his mantra still serves him well in his role as global head of traditional investments at Citi Private Bank, where he heads up a team of 17 due diligence analysts.
‘When I look at what I do today, I want these guys to be able to succeed, so I align them with the right asset classes. But I want them to have the ownership and be successful, and to me that’s what a coach does too,’ Marchesiello says.
‘If you’re successful collectively then you feel good about it. We spend so much time at work with the people we work with, so why not feel good about it?’
Marchesiello is responsible for the $23 billion traditional investment inventory on the firm’s $74 billion wealth management platform, which is available to 1,000 high net worth advisors and private bankers.
His portion of the platform consists of 280 recommended strategies, made up of 65 mutual funds, 65 exchange-traded funds (ETFs), 60 separately managed accounts (SMAs) and 90 funds available for sale outside the US.
That last set of funds reflects the private bank’s global advisor and client base. Marchesiello and his team put together separate high-conviction lists for each different geographic region.
‘The high-conviction lists for each region are there because there may be a strategy in Latin America that doesn’t resonate in Asia, so we have subsets for those regions,’ Marchesiello explains.
They also put together further select lists of around 20 to 30 strategies for each vehicle.
When considering ETFs, Marchesiello and his team use a series of initial quantitative tests to narrow the field. First, the team splits the strategies up by asset class and then uses factors such as liquidity, expense ratio, underlying constituents and tracking error to filter out funds that are performing poorly.
For every selection the analysts make, they document each test they have applied so it’s clear why their chosen fund has made the cut.
‘I’m a big fan of documentation and transparency… so we could see, throughout the process, where a fund was eliminated,’ Marchesiello says.
‘For example, if there are 10 ETFs in large cap value, we’ll look at it and we’ll say that we would probably eliminate anybody who is in the bottom quartile or the bottom half of those numbers. There really has to be a compelling reason why we would include it.’
The process is similar for mutual funds too, with Marchesiello and his team beginning with the whole universe for each asset class or category and then applying a set of screens to whittle down the options. They also look at style factors and past holdings to gauge how a portfolio is likely to behave in certain market conditions.
‘We take the quantitative dissecting of the numbers and then look at the behavior, to try and decide if it makes sense with what the analytics are telling us. Then we go into the full qualitative assessment,’ he says.
This is where the process diverges dramatically from the one used for ETFs. One of the main qualities Marchesiello and his team look for in a mutual fund manager is adaptability.
‘The great thing about this industry is that it changes every day and so [we look at] how managers adapt their portfolios to what’s going on in the marketplace and how they adapt their process,’ he says.
‘I’m not looking for somebody who changes all of the time, but if they said that they’ve been doing the same thing for 20 years then I’m not sure that I would hire that manager.’
The two most important qualities that Marchesiello looks for are a manager’s investment perspective and how their investment process really works.
He explains that he does not want to see a portfolio manager preaching performance from the outset, focusing only on their winners. He is also agnostic about size and believes that both large firms and boutiques have their merits.
‘I’m interested in the proven, recognizable names but I’m also interested in the unproven talent, which could be boutique managers or even large firms that started a strategy and may not have a track record,’ he says.
‘You have to make a judgment on how they have managed other strategies and if [the new strategy] will work. I think we are being paid to make that judgment.’
He gives the example of a strategy with just $50 million in assets, which his team decided to back before anyone else. ‘It was a large firm and a fairly new strategy and we thought “this would be an interesting fund but we’ll need to watch the asset growth,”’ he says. ‘The fund is now $1 billion and we came in when it was $50 million, so that was a case where we weren’t following what everyone else was doing.’
After managers are selected by analysts, they have to be approved by the investment committee, which is made up of Marchesiello and his 17 analysts. A manager can only be added if two thirds of the committee votes in their favor.
Once a strategy has been added to the recommended list, it is assigned to an analyst. This allows Marchesiello to keep a scorecard on each analyst, assessing the rolling performance of their managers relative to peer group and benchmarks.
‘My goal for all of the analysts is 60% outperformance, which is pretty aggressive, and our [overall] scorecard has been pretty good, in the high 50s to mid-60s,’ he says.
On the bench
If performance starts to dip, a manager can always be removed from the platform, which has a turnover of 35%.
Any change to investment process, organizational structure, personnel or performance figures could be enough to land a manager on a watch list for around three months.
The team then runs a performance outlier analysis based on historical track records to gauge whether a manager’s performance is becoming a problem.
‘As the manager starts to breach their confidence band on the upside or the downside it requires the analyst to really dig in deep on what’s going on,’ Marchesiello explains.
‘So I’m concerned about underperformance but I’m also concerned about outperformance by that magnitude, because then I want to know if they are taking more risk than we told clients they would be doing.’
Marchesiello describes one manager on his recommended list whose assets were growing, but who had a significant disconnect between alpha generation and asset growth.
‘It was a core fixed income strategy where a lot of their alpha was coming from structured credit or loans. We started thinking, given their relatively large size and the sources of their alpha, “they’re going to have a hard time, because now they are way too big to generate that type of alpha going forward,”’ Marchesiello explains.
‘Our view was that they were not going to be able to generate alpha. We expected their tracking error to go down, so we put it on watch and watched it for probably about 90 days. We saw what was happening and then we decided to terminate it.’
A fund will not always be cut from the platform when a key portfolio manager or team leaves. Marchesiello explains that if a succession plan is in place or if his team has enough faith in the firm, they may well stick with the strategy.
‘There was an emerging market strategy where the team left and actually we opted to go with the new team because they were a better fit and they had better resources available to them in terms of research capabilities,’ he says.
‘On the other side, there was a small cap manager who started up his own firm and we elected to stay with the large firm he left, simply because – given the asset class, the breadth of the research and their execution in small cap – we analyzed that we were better off staying with the existing firm.’
It's a ruthless approach, but knowing when to back your player and when to trade is as important in manager research as it is on the baseball field. Perhaps it's why this kid from Brooklyn is still at the top of his game.